This Is the Point When a Business Goes From Declining to Unsaveable

In this week's Rule Breaker Investing podcast, Motley Fool co-founder David Gardner is happy to have in studio an author he has admired for years: Les McKeown, whose first book was Predictable Success . After being involved with dozens of start-ups, McKeown developed a clear picture of what worked and what didn't. More to the point, he started noticing that there were certain patterns emerging in these businesses' life cycles, and the more he looked into it, the more he realized: The stages are universal, repeating across nearly every organization that lasts long enough to hit them.

In this segment, they consider the final two stages of an organization's life, and the reason that otherwise viable businesses can wind up in them. First comes "the big rut," which is a lot like the treadmill, but with one key difference. And after that... well, there's a reason stage seven is called "death rattle."

A full transcript follows the video.

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David Gardner: We're about to fall down another block. We've gone from predictable success and unfortunately, we've dropped down to treadmill. We'd like to get back, and we can, and that's always an optimistic, important point. But we didn't make the right decisions. We didn't know the framework. We made some mistakes and now we've dropped from treadmill into what?

Les McKeown: Into something that we call "the big rut." Now, what triggers that, technically, is if we stay in treadmill for too long. Remember those visionaries we talked about a few times? Ultimately, they're going to leave. Visionaries can't abide working in treadmill. It drives them crazy, because there's no sandbox for them to actually use their visionary skills. They're being asked to comply all the time.

And as that visionary style leaves the organization, it becomes a self-amplifying treadmill and it just becomes more and more like that. Decision-making becomes grindingly slow, and we fall into the stage called the big rut. And the difference between the big rut and treadmill -- there is only one difference. In the big rut we have lost the ability to self-diagnose. In treadmill, we were over-processed, but somebody was kicking against the pricks.

In the big rut, we're over-processed and we like it like this. This is pretty much the way we want it to be. Customers are a pain in the neck. Everything is scheduled within an inch of its life. I mean, just go down to the DMV and watch the DMV in action. And I don't mean to insult our fine public servants, but most DMVs are a great example of the big rut. It's just take a number, sit there for an hour and a half. I'll call you up, and if your forms aren't filled in perfectly, we send you back to the end of the queue.

Gardner: And hey, that's the way things have always been done around here.

McKeown: Correct, and that's the way it's going to continue to be done. Now, because of the inability to self-diagnose -- this is the important thing -- we're not yet in the final stage. We're in the penultimate stage, but if you fall from treadmill to the big rut, you are going to go to the final stage. You cannot recover from the big rut. It's impossible.

Gardner: Now again, there's a lot of optimism in this message. We're going to get back to that, but this is now the dark times.

McKeown: It is.

Gardner: For the Star Wars: The Original Trilogy , it's now The Empire Strikes Back really hard as we talk about the inevitability of dropping from the big rut to what is the final, seventh stage?

McKeown: "Death rattle . " And I call it death rattle because there are some artificial signs of life. Something is going on. Think of Kodak a couple of years ago. It's been through all of these cycles. And there was a little period of time when something was happening with Kodak, but what was it that was happening? It was being sold off for patent value. That's essentially what was happening. That is its death rattle time. It was gone.

In death rattle, the business might get piecemealed out. It might get bought for its asset value and be bought for its client book. Maybe just for its brand names. But whatever happens, it's over. The business is not going to ever be what it was before.

The key takeaway is the two stages in which you want to make very specific decisions about what direction you want to go in is whitewater, when either direction is entirely valid, or treadmill, where, let's be honest. Do you really only want to go one direction...

Gardner: You want to get back.

McKeown: ... which is to recover back...

Gardner: Yes.

McKeown: ... to predictable success.

David Gardner has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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